Bitcoins the key volatility index remains elevated, even as the S&P 500 VIX index, Wall Street’s primary gauge of fear, has eased from its gains following the Oct. 10 market jitters.
Observers attribute the stickiness in BTC volatility to factors including concerns about automatic deleveraging and poor market liquidity.
On October 10 vol spike and stickiness in BTC
Market panic on October 10, triggered by President Donald Trump’s announcement of tariffs on China, led to broad-based risk aversion, sending both stocks and cryptocurrencies lower.
On the same day, BTC’s price fell to around $104,000 from $122,000, and its annual 30-day implied expected volatility (IV), represented by Volmex Finance’s BVIV index, rose from 40% to 60%.
The index has since stabilized above 50% and has maintained elevated levels compared to the VIX index, which has fallen back below 20%, erasing the peak at 29%. The VIX represents the 30-day implied volatility of the S&P 500.
ADL risks
The divergence is due to traders pricing in new risks in the crypto market, according to Yoann Turpin, co-founder of crypto market-making firm Wintermute.
“Bitcoin volatility was muted earlier, characterized by regular premium selling, as market participants, especially digital asset treasuries (DATs), sought to generate returns and diversify their strategies. It has now become clear that new risks and market dynamics – such as ADL (auto-deleveraging) – were underestimated and are now being told in full in Coin Desk,” he says.
Auto-deleveraging (ADL), often the final step in the liquidation process, is triggered when an exchange’s insurance funds and liquidation procedures prove insufficient to cover losses from defaulted positions. In such cases, the system automatically reduces or closes profitable opposing positions to maintain the platform’s solvency, effectively socializing losses during market stress.
During the October 10 crash, several exchanges, including decentralized giant Hyperliquid, activated ADL to force closed leveraged short bets.
Essentially, the crash etched ADL risks, which were previously largely unknown or undervalued, into the psyche of investors, which is likely reflected in sticky implied volatility.
That said, Turpin expects volatility to remain elevated at current levels only if BTC rallies to new highs or new lows outside the $100,000-$125,000 range.
Liquidity problems
Liquidity in the cryptocurrency market refers to the ease with which digital assets can be bought or sold without causing significant changes in the market price. When liquidity is high, even large buy or sell orders can be absorbed without drastically affecting prices, helping to keep the market stable and reducing volatility. Conversely, when liquidity dries up, smaller orders can have an overall impact on market rates, often leading to increased volatility.
The October 10 market panic, catalyzed in part by the infrastructure collapse of Binance, the world’s leading crypto exchange by volume, has affected market liquidity and is paving the way for a new regime of high volatility.
“While the macro fears that initially triggered the rise have subsided, realized volatility has continued to rise and keeps IV supported. This may be a shift to a higher volatility regime rather than a temporary shock,” said Jimmy Yang, co-founder of institutional liquidity provider Orbit Markets.
“With many spot liquidity providers hurt during the recent crash, market depth has thinned, leaving prices more exposed to large swings,” he explained.
Griffin Ardern, head of BloFin Research and Options, blamed tight fiat liquidity conditions in offshore regions (non-US markets) for heightened BTC volatility.
“The Hong Kong dollar overnight lending rate (HIBOR) has returned to pre-May levels, while the DXY has actually risen since October, even during a period of rate cuts. This is a clear sign of tight liquidity, which often triggers volatility,” Ardern said. “BTC’s volatility is largely determined by the offshore market.
